China drops bank lending from economic targets

ChinaBureau

BEIJING (MarketWatch) -- Missing among the myriad economic targets unveiled by Chinese Premier Wen Jiabao on Saturday was the annual target for new bank lending, which up to now has been an important part of Beijing's arsenal to control liquidity and inflation.

Chinese regulators and the country's top bankers said Saturday the target was left out because authorities believe they have found more effective ways to rein in total liquidity, and that lending growth is likely to slow this year even without an official target.

Regulators have switched their focus to a broader measure of "total national financing," bankers and regulators said on the sidelines of Wen's speech before the National People's Congress.

The People's Bank of China unveiled total national financing last month as a new measure of the total supply of credit to the economy, saying it offers a clearer picture of financial conditions than the traditionally used measure of new yuan loans.

To be sure, the PBOC can also still issue so-called window guidance--hard to resist advice--to banks on their lending, which can act as an un-announced quota on quarterly lending by individual banks.

In addition, the central bank is relying on a new method of "differentiated" reserve requirements, forcing more aggressive lenders to hold higher levels of reserves.

Punishing banks that lend excessively by raising their reserve requirements will be a more effective, market-based method to control lending, said Yang Kaisheng, president of Industrial & Commercial Bank of China Ltd., the nation's largest bank by market capitalization.

"A higher reserve requirement ratio is not in a bank's interest, so it will naturally adjust its actions," he said.

Yang, along with other chief executives of many of China's largest banks, is a member of the Chinese People's Political Consultative Conference, an advisory body that meets alongside the National People's Congress, China's legislature.

China Merchants Bank Co. President Ma Weihua said total new bank lending this year is likely to slow from last year's CNY7.95 trillion, which was above the official target of CNY7.5 trillion. Bank of China Ltd. President Li Lihui agreed that total loan growth is likely to slow this year.

Meanwhile, Dong Wenbiao, Chairman of China Minsheng Bank Corp., the country's first wholly private bank, said his own bank's new lending is likely to remain flat this year.

Xia Bin, an adviser to the People's Bank of China, said the central bank's campaign of reserve ratio hikes will affect banks' profitability. The PBOC has raised the rate twice so far this year and eight times since the beginning of last year. It now stands at 19.5% for most large banks.

In a possible indication that Xia is right about the effect on bank profits, Bank of China's Li said there is likely no further room to keep hiking the benchmark ratio, as the current level is already very high. Li added that Bank of China's reserve ratio is currently at the benchmark 19.5% level, meaning the bank isn't among those that have been asked to set aside additional reserves.

ICBC's Yang also praised the new focus on total national financing. "The central bank is coming out with a new way of thinking, which is to control the total supply of national financing, not simply controlling bank lending," he said. "As the financial system has developed, and new direct financing channels have increased, bank lending actually only makes up half of total national financing."

Total national financing, as outlined by the central bank last month, includes loans from lightly regulated trust companies, corporate bond issuance, equity fundraising by non-financial companies, and other measures. It indicates that there was a total supply of finance of CNY14.3 trillion in 2010, including CNY6.33 trillion extended by non-bank financial institutions.

It remains unclear if Chinese authorities will set a clear target for total national financing, or if it will remain merely an indicative reference point for policy makers. Many market participants have questioned how any hard limit could be enforced, given that different regulatory agencies have purview over different kinds of financing.

Tang Shuangning, chairman of state-owned conglomerate China Everbright Group., which includes China Everbright Bank Co., flagged such concerns on the enforceability of any national financing target.

"It's the right direction for the central bank to adopt the national financing index as part of its monetary policy, but I think it will be not easy to manage liquidity with the index because of the complex financial regulatory system," he said.

But People's Bank of China Vice Governor Yi Gang, also speaking on the sidelines of the NPC, dismissed such concerns about implementing a national financing target.

"As for its regulation, I think according to monetary policy and our financial regulation framework, there should be a natural division of labor and coordination."

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